Latest data and publication from McKinsey reiterates the fact that successful companies manage and develop their intangible capital more effectively. McKinsey has coined it as TCR, Tangible Capital Ratio

Oct 2013, McKinsey: Intangible Capital

Check exhibit 2 which highlights the difference in intangible capital between top and bottom quintile companies

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Comment by Kenan Jarboe on October 25, 2013 at 10:39am

The McKinsey finding are very interesting, but I think they don't really get it.  First, as Nick points out, the "total" capital appears to be book value not market capitalization.  Thus, it misses internally-generate intangibles which are not captured in book value.

Second, again as Nick points out, they see goodwill as simply the price premium in an M&A -- rather than the accountants' catch-all for all the intangibles they can't measure.

Thus, they can make a statement like this:

"Somewhat counterintuitively, however, the weakest EP performers have the best TCR and the strongest the worst. For top companies routinely engaged in M&A, the added cost of goodwill is apparently more than recouped in profitable scale." 

For those who understand intangible capital, the finding is not counterintuitive at all. The data is completely in keeping with the fact that physical capital is no longer the driver of profitability & revenues!

Comment by Nick Shepherd on October 24, 2013 at 6:51pm

I am glad you asked that question Mary! As a financial person I am also a little challenged by the research and how to align it with the overall issue of intangibles. One of the key problems appears to be to me - that where there is goodwill the buying organizations have crystallized the value of the intangibles of the acquired company whereas others do not have it. In these cases - if the valuations are all made on book value rather than market, the comparisons are between apples and oranges (companies that have higher book values due to M&A versus others that clearly understate their value because intangibles have not been crystallized). Maybe I have missed something or don't understand it - but it may be that this paper actually begins to awaken the problems of accounting having a mixed approach to the presentation and inclusion of intangibles. Interesting.

Comment by Mary Adams on October 19, 2013 at 1:49pm

Thanks for sharing this Shovik. I think they've taken an interesting approach. Since they are using only book value (no market value) data, those with a low TCR are those that do acquisitions with large goodwill components. But it makes it look like these are the only companies with large intangibles which of course isn't the case. I'm trying to figure out what lessons are there are here for us?

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